Wednesday, November 16, 2016

We’ve all now come to
grips with the result of the U.S. election. Given the polls just before election day, the
outcome was a surprise, to say the least. The result has been compared to Brexit, which
was one that was similarly surprising.

Perhaps we are less
sceptical. Living in the world of
financial markets, we know that probability is only ever as the name suggests. It represents something that is likely or
probable to occur, and so is very different to the word certainty.

Markets quickly
adjusted yesterday as reality set in. Overnight,
S&P 500 futures markets were down. It
has rebounded today though, and is up 1.4% at the time of writing. All that means is that, ironically, investors
don’t know what this means. Will the
American business community reign Trump in, or will he be allowed to follow through
on his election campaign promises? Trump
won’t be able to pass law, but he will be able to put a block on securing trade
deals (such as the TPPA), for example. Many
New Zealanders that are anti-TPPA would also be very anti-Trump, and yet he’s
very likely to kill the deal that they didn’t like. It shows how complicated this election really is.

From the perspective
of your portfolio, it’s intriguing to look at the relationship between the US
president and investment returns. Historically,
markets have done better when a democrat is president rather than a republican
(9.7% growth as compared to 6.7%). However,
the same data shows the markets do best when the republicans control both the
House of Representatives and the Senate.

After
this election, the republicans hold the House, the Senate and the presidency.

But
there is more to the data. When the US president has a negative approval
rating the markets have done 4% better than when the country gives the
president positive ratings.

In
reality, the data indicates that the relationship between investment markets
and the presidency is a fairly weak one. What drives markets are
businesses that innovate, solve problems and continually provide better goods
and services at lower prices. Businesses have been doing this for
hundreds of years and will continue to do so for many more.

Someone
almost universally regarded as being one of America’s worst presidents was
Warren Harding, the 29th US president (1921 – 1923). Amongst his many
blunders, he appointed a number of corrupt officials. One of his cabinet
secretaries went to prison for corruption. [1]

How did he get
elected? Author Malcolm Gladwell suggested in his book Blink
that people believed Warren Harding would be a good president because he
appeared stately and presidential. It was a “blink” decision. [2]

Why do we
bring this up? Only because between 1921 and 1923, the Dow Jones returned
around 32%. [3]

“Conventional
wisdom says a president’s economic policies matter greatly to Wall Street. But…
investors since the Great Depression have managed to make money in war and
peace and under successful and failed administrations.”[4]

Many
of our clients are invested in portfolios built to last 20 to 30 years. Over that time frame, both good times and bad times are a given. That is the nature of capitalism which funds, what we can see in
retrospect, are both worthwhile and worthless economic ventures. We
believe history shows us that a globally diversified, low cost portfolio is a
ship that can and will survive the storms of politics, because it is founded on
the success of business. Presidents come and go, but business in
aggregate has never gone out of business, and won’t in the future, whatever
president-elect Trump does.

So
we encourage you to relax, to tune in to the news as an interest, but know that
your long term plans are based on something much more solid and stable than
politics.